iRhythm Technologies Inc

NASDAQ:IRTC

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the iRhythm Technologies, Inc. Q1 2018 Earnings Conference Call. [Operator Instructions] As a reminder, the conference is being recorded. I would now like to turn the call over to your host, Ms. Lynn Lewis, Investor Relations.

[Lynn Lewis, executive]

Thank you, Sonia. Thank you all for participating in today's call. Joining me are Kevin King, President and Chief Executive Officer; and Matthew Garrett, Chief Financial Officer. Earlier today, iRhythm released financial results for the quarter ended March 31, 2018. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, our examination of operating trends and our future financial expectations, which includes expectations for hiring, growth in our organization and reimbursement, guidance for revenue, gross margins and operating expenses in 2018, are based upon our current estimates and varied assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recently SEC report on Form 10-K with Securities and Exchange Commission. iRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 2, 2018.

With that, I'll turn the call over to Kevin.

[Kevin King, executive]

Thank you, Lynn. Good afternoon, and thanks everyone for joining. Our first quarter results represent a strong start to 2018. Revenue for the quarter was $30.6 million, up 51% over prior year after adjusting for ASC 606, and gross margins increased by 3.1 points to nearly 72%. Importantly, we saw our expanding market acceptance for both ZIO XT and ZIO AT. Our continued success in growing our sales channel to meet demand for our service gives us great confidence such that we're raising our revenue guidance for the year to $128.5 million to $133.5 million from $126 million to $131 million, which represents an ACS (sic) [ ASC ] adjusted growth guidance in the range of 36% to 41%.

I'd like to take a few minutes to provide some of our recent business highlights, and then I'll turn the call over to Matt for a financial review of the quarter.

Starting with sales team expansion. Recall that we began the process of adding sales reps in the second half of 2017 after expanding our sales management infrastructure in the first half of the year. We ended 2017 with 86 reps, and we indicated on our last call the plan to exit 2018 with 106 to 112 reps, with the majority of hiring occurring in the first half of year. Sales team expansion in the first quarter went exceptionally well as we not only saw a significant number of highly qualified candidates, but we were able to hire ahead of our plan. Given our success in the first quarter, I'm confident that we'll reach our stated goals in time frames for the year.

On the market expansion front, I am pleased with the ongoing progress that our sales team is making in new accounts and existing accounts. A key component of our growth strategy is to continue to aggressively drive market penetration as we believe our total share in the symptomatic arrhythmia monitoring market is around 10% in the U.S., and so there exists significant potential for growth as we scale our organization.

We're continuing to parallel track ZIO XT expansion initiatives alongside our initial release of ZIO AT, our next-generation ZIO biosensor released late last year. As a reminder, ZIO AT offers real-time event reporting for use and detecting and diagnosing arrhythmias associated with conditions, such as syncope or fainting, that require a more immediate notification and actions. It addresses approximately 10% of the total available ambulatory monitoring market. Our ZIO AT offering allows us to fill an important unmet need for customers by providing a high degree of clinical accuracy obtained through uninterrupted, continuous monitoring through strong patient compliance enabled by our patented wearable design and a significant reduction in the number of over notifications that are often present with alternative approaches.

Early customer experience with ZIO AT continues to validate the differentiated product offerings that we've developed. Our expectation has been that ZIO AT will help drive pull-through opportunity for our ZIO XT, and we are seeing this unfold within accounts that have already adopted both service lines.

Moving on to expansion of our addressable market. We continue to evaluate opportunities and support clinical studies for our ZIO Service. The clinical use case that remains at the top of our list is the monitoring of asymptomatic or silent atrial fibrillation in high-risk patients in market of greater than 3 million patients today. These are patients who have not been diagnosed with atrial fibrillation, but have high risk factors, such as age, diabetes or hypertension, which may predispose them to AF. Early diagnosis in these patients would allow them to be medically managed through therapies, such as anticoagulation, that would significantly reduce their risk of stroke. To this end, we're very pleased with the full 1-year results of the mSToPS study presented as a late-breaking trial at ACC in March. The study is a collaboration between iRhythm, Scripps Translational Science Institute, Aetna and Janssen. mSToPS was designed to evaluate the detection of silent atrial fibrillation in high-risk individuals using our ZIO Service. It is notable that ZIO enabled the design of the first-ever, nationwide, digital trial in which subjects were remotely enrolled and not required to visit their local medical center. Results of 1 year show that AF was newly diagnosed in 6.3% of patients, who are actively monitored by ZIO versus 2.3% in the observational control group receiving routine care. In addition, 4% of patients in the ZIO monitored group were found to have potentially actionable arrhythmias other than atrial fibrillation. Monitoring with ZIO led to significant changes in clinical treatment of the actively monitored group, including initiation of anticoagulation therapies, antiarrhythmic medications and pacemaker placement. We believe these results represent a strong first step in our efforts to develop the market for targeted detection of asymptomatic atrial fibrillation, and we look forward to the further clinical evidence to be generated from this and other studies, including a 3-year endpoint for mSToPS that will evaluate stroke rate and cost effectiveness between ZIO monitored and routine care groups.

We've also been pleased to see how the clinical community continues to gain appreciation for the benefits that extended continuous ambulatory monitoring from our ZIO Service offers. A few weeks ago the American Heart Association published a scientific statement on atrial fibrillation burden, which highlighted the importance of characterizing AF based on the percentage of time that a patient is in F -- in AF during a monitoring period. ZIO was in a unique position to provide a truly unique measurement of AF burden as we are the only ambulatory monitor that can continuously record and report on every single heartbeat for up to 2 weeks. Other monitors report only events or have shorter -- significantly shorter durations. We look forward to demonstrating the clinical utility of AF burden as measured by our ZIO Service in subsequent publications this year.

In summary, the iRhythm team continues to deliver and I'm proud of the progress we're making towards our 2018 goals to further grow our U.S. sales force, expand our product offering with ZIO AT and increase our addressable market opportunity.

Looking further ahead, we're paving the way with investments that set the stage for longer term growth within international and new segments of the U.S.

Before I turn the call over to Matt, I'd like to welcome Dr. Noel Bairey Merz to our Board of Directors. Dr. Merz, an international figure in preventive cardiology and heart disease in women, currently serves as the Medical Director of The Preventive and Rehabilitative Centers of Cedars-Sinai as well as the Endowed Chair of the Barbra Streisand Women's Heart Center at the Smidt Cedars-Sinai Heart Institute. She's also a Professor at Cedars-Sinai and UCLA. Her remarkable and extensive clinical experience in cardiology and her involvement with a wide range of organizations makes her an excellent addition to our Board of Directors.

With that, I'd like to turn it over to Matt Garrett, our CFO, for a review of our financial results and guidance for 2018.

[Matthew Garrett, executive]

Thanks, Kevin. We are very pleased with our overall finance performance. And as mentioned last quarter, we remain very encouraged with the fundamentals of our business, most notably in the rapid, but yet coordinated investment into our infrastructure, inclusive of sales force hiring. If there was a theme for the quarter, it would be our execution on an accelerated sales hiring plan placing us ahead of our own aggressive internal goals.

Highlights for the first quarter. Incorporating ASC 606 impact to all periods include revenue growth at 51% year-over-year and sequential growth of 14%; gross margins of 71.8%; continued success in new XT contracts and strong acceleration in AT payer contracting; and as previously mentioned, a significant step up in sales and sales operational teams, most notably in the sales rep expansion.

As a reminder, effective January 1, 2018, we adopted a new revenue recognition standard, ASC 606, which primarily impacted the company's recognition of revenue related to patient claims paid by third-party commercial and governmental payers. We adopted ASC 606 using the modified retrospective method, which means that the total amount of revenue reported for the first quarter 2017 has not been restated in the current financial statements. In the interest of comparability during the transition year, on this call, I will be providing revenue, gross margin, operating expenses and net loss information for the first quarter 2017 on a non-GAAP pro forma basis, as if ASC 606 had been applied.

In addition, we have included an updated reconciliation table in our press release.

Taking a more detailed look at first quarter results then. Revenue for the 3 months ended March 31, 2018, was $30.6 million, an increase of 51% year-over-year and 14% sequentially. Growth for the quarter continues to run consistent with our trended guidelines. Volume to price/mix remain in 80-20 ratio, while new store same-store unit growth continues to trend right around 50-50. We see these trends as very encouraging signs for our business as we continue our rapid expansion into this large market opportunity.

We also point to our continued success in on-boarding large, integrated networks as an ongoing catalyst for our growth. The feedback we received from customers on the on-boarding process, physician workflow improvements and EMR integrations has been extremely positive.

Finally, our continued contracting success and overall revenue cycle management improvements has led to a tangible reduction in patient friction, giving us great confidence in our ability to attract and expand our reach into large networks. These success stories also support the belief that our enterprise information system and workflow -- excuse me, and workflow tools act as a key component of our competitive pillars creating a funnel for broad adoption opportunities and ongoing stickiness in established accounts.

Turning our attention to the rest of the P&L. Gross margin for the first quarter of 2018 was 71.8% compared to 68.7%, a 3.1 percentage point improvement over the same period in 2017 inclusive of ASC 606. Margin expansion continues despite the startup costs associated with the AT launch driven by increased contracts claims mix, productivity gains through our proprietary algorithms associated with report generation and continued reduction of device-related manufacturing costs. Operating expenses for the first quarter 2018 were $32.6 million, an increase of 67% compared to $19.5 million for the same period of the prior year, 2017 -- excuse me, inclusive of ASC 606. A significant amount of the incremental growth can be directly attributed to our continued focus on sales force expansion. We are extremely pleased with the significant progress we've made on our sales force expansion efforts. In fact, we are well ahead of our own aggressive hiring plans on quota-carrying reps for the year. This is an extremely important accomplishment for the company and sets us up well for rapid expansion of the business, particularly towards the fourth quarter of 2018 when these new reps start to become productive. That aside, we continue to invest heavily in our research and development organization with year-over-year expense growth at 53%. In the quarter, there were continued costs associated with our attestation work for SOX 606 -- excuse me 404(b). These costs make the remainder of the incremental spend. The net loss for the first quarter 2018 was $11.1 million or a loss of $0.47 per share compared with a net loss of $6.1 million or a loss of $0.28 per share for the same period of the prior year.

Turning to our guidance for the remainder of 2018. Based on a strong start to our year and accelerated sales force hiring success, we are raising our 2018 revenue guidance range to $128.5 million to $133.5 million from $126 million to $131 million, representing annual growth of 36% to 41% adjusted for ASC 606. As recorded patterning of the sales, we again strongly encourage investors to review historical sequential trends as they build their models, inclusive of the summer seasonality for Q3 and understand that new quota-carrying reps that have recently been hired, or in the process of being hired, will not achieve meaningful productivity levels until Q4 of '18.

Gross margin for 2018 is expected to range from 71.5% to 72.5%, up from 70% to 72% at the beginning of the year. We also take this opportunity to reiterate our belief that at scale, the company can expect gross margin ranges of 75% to 80%. With our accelerated exercise nearly complete, we're also raising operating expense projections to a range of $127 million to $132 million, including $16 million to $18 million for research and development and $111 million to $114 million for SG&A. Our decision to increase spending can be directly attributed to our improving confidence and visibility that these investments, both in sales force expansion and operational infrastructure, will continue to support our top line growth objectives. We reiterate that we've made significant progress on our goals to hire between 106 and 112 reps by the end of the year with a significant number of these reps on board as of April. We will continue to assess the market opportunity and need to hire in advance of our guidance, and we'll continue to provide updates as to how we are tracking toward this goal as the year progresses.

We now like to open the call to questions. Joining me for Q&A is Kevin King, President and CEO; and Derrick Sung, our Executive Vice President of Strategy and Corporate Development.

We'll now like to open up the call for your questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of David Lewis from Morgan Stanley.

[David Lewis, analyst]

Hope you can bear with me here for a few questions here, a lot to cover. First, I have questions more tactical or one strategic, Kevin, for you. But just first off on AT adoption. I wonder Kevin if you could share with us a little bit about how the product is being used? What I'm more focused on is, kind of a sense of where growth is coming from and you talked about pull-through from AT. So how much of this is pull-through from AT? How much is sort of market share capture or share gains against MCOT? And when can we expect an update on run rate revenue for this product, if that happens as early as the second quarter?

[Kevin King, executive]

Sure. Hi, David. So ZIO AT is being used in patients that were previously unaddressed by ZIO XT. These patients present with near-life critical symptoms, if you will, unexplained loss of consciousness, symptoms that might be indicative of ventricular tachycardia, for example. And so the share that we're getting here is from MCOT that was previously used in these accounts that were in. The way that we're getting -- so that kind of answers that one. The way that we're getting the pull-through is we're seeing accelerated growth of XT alongside the new adoption of AT. And we believe that competitively what's happening here is the single system that we have, this single enterprise system is being recognized as being valuable for prescribers and their staff such that they're using less of other products overall. That's the way we're thinking about it. And we probably won't report out AT or even international revenue, which was a question, I think, we had the last time, until we get material maybe 10% of our sales or something like that, pretty close. But at this point, it's still kind of early days for us. But a wonderful product, doing well. It's helping existing accounts, it's helping us to get new accounts, and AT is taking share from MCT and the single system that we have now is helping us to take share in both.

[David Lewis, analyst]

Okay. And just -- thank you, Kevin. A couple more for me. I mean, the first is sales force. Can you gave us a sense of the second half '17 reps. How that utilization is tracking relative to the plan? Is it safe to assume that 20 rep number is a conservative number for 2018? Should we be thinking more like a 30, 40 rep number makes more sense in light of the spending?

[Kevin King, executive]

Well, we guided to 106 to 112 from 86, so what is that, that's 20 to 25. And we're -- our goal is to get all of those tucked in before the first half of the year. And as we reported here, we're pretty down close. So I would think the upper end of the 25 by the first half, and then we'll report out after that. The reps that we hired last year in the third and fourth quarter will start to become productive now here in Q2, Q3. As you know, it takes 1 to 2 months -- 1 to 2 quarters for us to really get some traction with those folks, get them trained up and get them in their territories, et cetera.

[David Lewis, analyst]

Okay. And the last, and I'll jump back in queue, and thanks for bearing with me here. Just you, since the time of the IPO, Kevin, the market here, the diagnostic monitoring market broadly has really advance. So could you just spend a little bit of time on the competitive differentiation of your product and your confidence in the work you've done here around reimbursement, specifically your coding? And I'll jump back in queue.

[Kevin King, executive]

Sure, sure. Look, I think, from a competitive standpoint, good competition spurs innovation, right, and we think that's a good thing. I would say from a customer standpoint, we're always talking about changing status quo, and changing that status quo is about creating new value for the customer. And unless that value that, say, competition is putting in front of a customer is proven, better and more complete than ZIO, there's really no reason for them to change. So I think from a competitive standpoint, we're in a really solid position. And I'll give you a couple of examples of why I think we're better, complete and proven overall. So on the better side, we know that -- we know this peer review publications that 14 days of continuous monitoring is proven to be better, to have better diagnostic yield, faster time to diagnose and resulting in fewer repeat tests than any other modality, whether it's a 3-day, a 5-day, or 7-day pull-through type device or even an intermittent device, even an MCOT device is not as high on the diagnostic yield. And as a result, we've become the standard of care by which all competition is compared to. ZIO is somewhat of a verb, if you will, at our accounts. And we have very strong IP around the physical aspects of our devices, if you will. On the proven side, I would say that our data analytics capability, this 1.5 million plus patient database that spurs the algorithmic capabilities is proven to a point now where recently we published a study where we outperformed expert cardiologists in the diagnosis of 14 arrhythmia classes consistently. And so our AI tools are performing better than expert cardiologists, and that's important because that gives the prescriber the increased assurance that their patient is going to be diagnosed. And from a competitive standpoint, I think, that that's the bar that others have to raise to and not make a claim that they're equal to, but they've to prove that they're better. And we've done that. In addition to, the analytics capability that we have has created new sources of value, like atrial fibrillation burden. We have studies that will be coming out shortly that will highlight the strengths of iRhythm and the uniqueness and the proven nature of iRhythm's ability to determine atrial fibrillation burden and its impact on patients' lives, treatment decisions, et cetera. On the completeness side, I think, Matt said it best. The enterprise capability that we have is unmatched. And really to kind of change status quo, you have to scale at the enterprise level. The reason for that is positions are no longer incented with volume. They are incented with value, and they're overworked, overloaded and they want us to do -- take on more of the responsibility for them relative to ordering, prescribing, results reporting, claims processing, results routing, et cetera, in their enterprise. And that has to be done seamlessly over and over again, and we've got that capability. So while the market has expanded in interest, I think it's expanded mostly in devices that are unproven or less capable of measuring and providing an impact to ZIO and the system. On the reimbursement side, David, I'm not quite sure of the question. Maybe you could help me to understand that one a little bit.

[David Lewis, analyst]

Sure. Just your confidence in operating under the existing reimbursement codes that you're using and maybe sort of an update on the traction you've been having as you've been consistently renegotiating these payer contracts?

[Kevin King, executive]

Yes. As we stated before, many of our contracts are 1 year or 3-year renewable. In some cases, they renew automatically and sometimes they are renegotiated. We've not had any price decreases in the 4 or 5 years that I have been here. Relative to -- I think maybe you're referring more to CMS pricing. We have a Category 3 code that we've had for, I guess, since 2012 that was established by the ACC, American College of Cardiology, on our behalf. And in 2017, we approached the ACC and asked them what we should do, and they suggested we wait, and they renewed, or the CMS process renewed for an additional 5 years to 2022, I guess, it is. As far as stability of that, that price that we have is negotiated locally. It's been reviewed every year. It's gone up or down by $1.50 to down $1.50 over that period of time. And most importantly, I think, David, is the process that we went through to obtain our pricing with CMS is exactly the same process that we would use for, if we would have moved to a Category 1 code. In other words, it was built up using the same tools, the same processes, the same inputs that derive the $369.70 that compasses the global code and $310 that we use for our technical code. So I don't really see much of an incentive nor do I see much of a risk in pricing. And it's really incumbent upon the ACC to tell us when they think they want to have us move it forward. And if they want us to, we can, but at this point, I don't see any risk upside or downside risk on the pricing side of it. I was just going to say, you know, in the early days of our company, CPT III codes were tough because they represent a challenge to commercial payers, or commercial payers use them as a barrier. But now that we're so deeply penetrated with commercial carriers, we don't even think about the challenges of CPT III codes. We've moved beyond that pretty extensively.

[Operator]

Your next question comes from the line of Robbie Marcus from JP Morgan.

[K. Gong, analyst]

This is actually Allen on for Robbie. Just a quick question on mSToPS. Obviously, I think, we all saw the really good data you have put on ACC and it's, obviously, still early, but have you guys begun or do you have any plans currently to begin kind of preparing that space for your ultimate plan to kind of enter either in terms of discussion with payers, like really pushing that data or with docs?

[Kevin King, executive]

Yes, we are -- you know it's a two-pronged approach here. The 3-year readout will be the most impactful driver of adopting, if you will, because then we would prove not only the clinical utility and validity of using this -- using ZIO on these high-risk patients, but we would also have the economic data to support us. That said, we are working in the background now with payers. We are working with medical societies, and we're looking at trying to promote this as best we can in the early days because there is meaningful work here to be done -- meaningful value to be created, if I should say, not work to be done, meaningful value to be created in the short term.

[K. Gong, analyst]

Okay. And then just a quick follow-up. I know you mentioned that you will be having more data reading out in the back half of the year. I am assuming from SCREEN AF, do you still expect to kind of publish on that later this year? And once that comes out -- again, I know you said you're waiting mostly for the 3-year data, but how about data kind of play into your strategy?

[Derrick Sung, executive]

Sure, Allen. This is Derrick. I will take that one. The SCREEN AF study, which is a study, which also addresses that sound AF population, that is still underway. I think that currently we would expect some initial results for that, probably to be out next year, not this year. And in addition, I think, there is also some analysis from mSToPS that could come out in the meantime. And we do have some initial -- additional other studies that are -- that we expect to come out. In fact, I take this time to mention that at HRS next week, there will be 2 posters, which continue to further highlight the value of our ZIO Service. One poster is focused on examining the prevalence of silent or subclinical AF in the elderly population, and that's being presented on May 11. And there's another poster that's looking at atrial fibrillation burden as measured by ZIO and association with cognitive function, and that's being presented on May 10. So we expect the clinical evidence to continue to trickle out over time.

[Operator]

Your next question comes from the line of Jason Mills from Canaccord Genuity.

[Jason Mills, analyst]

Can you hear me, okay?

[Kevin King, executive]

Yes, we can.

[Jason Mills, analyst]

So I'll try to be quick. So question on revenue, question on gross margin. So with respect to the reps, last year, it was pointed out that you had a fairly good end to the year in terms of sales rep hiring. And then this year, obviously, even an acceleration seemingly on that sales rep expansion success. So wondering Matt, if there's been any change at all just with respect to the ramp -- productivity ramp for those new reps. Is the model sort of changed at all positively or negatively? Or is it fairly similar to the on boarding and ramp sort of algorithm that some of the initial reps had?

[Matthew Garrett, executive]

Yes, Jason, that's a great question. I think the way I would answer that is, we're not ready to provide any additional or new guidance on sales rep productivity, which currently stands at $2.25 million in the 3- to 4-year period. I would just -- but I would say anecdotally that we are seeing -- we're cautiously optimistic that we're seeing the level of productivity in sort of the high-end of those ranges, and not just for your seasoned rep, but for your new reps as well. But it's just too early days, too, with such a large number of new hires coming on board for us to provide any more guidance than that. But again, cautiously optimistic where we are from that particular guidance standpoint.

[Jason Mills, analyst]

And then secondly on the gross margins. You've clearly laid out your expectations for the year-end, and then it's glad to hear your expectations for longer term haven't changed. But for the year, Matt, is there any reason to think that the cadence with respect to your gross margins and, I guess, more specifically, how the volume is impacting your COGS percentages and, therefore, gross margin percentages as the year progresses rather than to what we've seen in the past? I guess another -- I guess a more simplistic way to ask it is, you start the year close to 72% sequentially, is there anything we should be watchful for that would suggest that sequentially we will see gross margin down in a given quarter, given that it seems like notwithstanding the seasonally -- the seasonal issue in Q3 that most medtech companies face, does gross margins should continue to tick up from here sequentially? I just wanted to make sure that we don't have anything that may impact there?

[Matthew Garrett, executive]

Let me address the second part of your question first. Seasonality in and of itself would not have an impact on our gross margins. And I think, overall, I think your initial comment is the correct one, which is we should continue to see that standard cadence as we move sequentially throughout the year. There is no specific material reason I'm aware of that would cause any sort of upwards or downwards depth at the present point in time. But as we continue to invest heavily in our deep learning and AI tools there could be a small adjustment here or there, but again nothing that I feel at the present time is going to have a material impact one way or the other as we sequentially grow those gross margins over time.

[Operator]

Your next question comes from the line of Glenn Novarro from RBC Capital Markets.

[Glenn Novarro, analyst]

I have got two questions. The first with respect to the [indiscernible] guide. You've given $1.5 million in a high [indiscernible] going up by more than that. So my question is what's giving you the confidence so early in the year of [indiscernible] the raised guidance. I am trying to heard from sales productivity, AT, [indiscernible] sales force hires. Have I missed anything? Is there something that's driving the confidence more than what I just mentioned.

[Kevin King, executive]

Glenn, your -- the reception on your call is pretty poor. We're going to try to repeat the question to make sure we got it. There was a background echo there. Matt, do you want to repeat the question? Or else, if you got it, go ahead, you can tell us, and then we'll go ahead and answer.

[Matthew Garrett, executive]

So I think, Glenn, what we've heard was, yes, we had a beat of about $1.5 million to guidance and there is a raise on top of that, which connotates to a little bit of optimism to our guidance. And we're -- and I think you're going into a little bit of detail on the sales reps have that impact or is there something else? Let me stop there and see if that is the gist of your question?

[Glenn Novarro, analyst]

Yes, that is correct.

[Matthew Garrett, executive]

Okay, great. So the answer is -- I'll answer almost the same way I just answered to Jason as it relates to the sales productivity levels. We're cautiously optimistic of what we're seeing coming out of Q4, obviously, and now out of Q1. We are ahead of where we had our own internal aggressive hiring standards. And if that is the case, and we feel that we're seeing some good traction with both new and existing reps vis-à-vis our productivity levels, I think all of that, along with Kevin's comments about some of the AT, albeit immaterial at the present time, gives us a little bit of confidence as we move towards the second half of the year. And that's the reason for us not only providing a beat, but a slight raise in guidance as well.

[Operator]

Your next question comes from the line of Gene Mannheimer from Dougherty & Company.

[Eugene Mannheimer, analyst]

With respect to the nuances around the patient and symptoms that lead a doctor to prescribe the AT over the XT, curious if your AT service has a slightly different call point than the XT. For example, the electrophysiologist versus the primary care doc or general cardiologist?

[Kevin King, executive]

Well, the call point for our sales team is at the enterprise level. So we have call points with electrophysiologists, with cardiologists, with cardiac surgeons, with the emergency department, with neurology, with primary care, essentially making certain that wherever patients that are symptomatic of whatever heart rhythm abnormality might there be that these physicians are trying to know which product to prescribe. I would say, in general, though, I think the heart rhythm specialist, the EPs, probably see or get referred more frequently the higher acuity one. So it could be that there was a disproportionate opportunity amongst electrophysiologists. That said, I think, we're equally strong in general cards as we are in EPs and so forth.

[Eugene Mannheimer, analyst]

Okay, that's good color. And just to clarify that productivity metric per rep $2.25 million, that's inclusive of both the XT and the AT service right at scale?

[Kevin King, executive]

Well, no. The number that Matt gave to you was the rate current that we're at. And so that current rate that he gave it to you was in the fourth quarter. In the fourth quarter, we have essentially very, very little AT business. We've not put forth a pro forma of forward-looking number of what our productivity would be. We really don't know how high that could get, and I think that maybe gets to your point as well given the disproportionate pricing between an AT and an XT. If the mix is 90-10 versus the mix is 80-20 or 70-30, then the productivity changes quite dramatically. But we're not projected that forward, and all we've give given to date is largely XT business.

[Operator]

Your next question comes from the line of Suraj Kalia from Northland Securities.

[Suraj Kalia, analyst]

So Kevin 2 questions, and please forgive me if they've already been asked, just toggling in between 2 calls. Can you all give us a road map on how you see the average turnaround time, once the ZIO Patch is sent to you all getting reduced from the current 2-week period? I know you all are investing a significant amount of dollars in your machine learning algos. Any road map you can provide for the next 4 or 6 quarters, how should we look upon that?

[Kevin King, executive]

Yes, you might -- unless I misunderstood the question, you might be confusing 2 elements. So there is a wear period, so the patients are wearing ZIO Patch on average 13.7 days out of a 14-day prescription. So we're nearly fully utilized. The turnaround time for report is the same day that we get the patch back from the patient. We don't have a 2-week queue for reporting. We report on the same day.

[Suraj Kalia, analyst]

Okay. Forgive me. My understanding is that it usually takes another 2 weeks even if it's in the queue, and that's part of the machine learning alogs, but I can certainly take it offline. The other thing, one of the things you all mentioned is, you all are taking on more in terms of claims processing in other aspects, which the physicians want to offload to you guys. While it helps capturing the patient and the topline, the technical component remains the same. Is there a point of diminishing returns where you say, you know what, we can do more than this. Or taking on more is essential to capturing the patient. I guess, what I'm really trying to address through all of this is, at what point do we start getting a sense of the OpEx leverage in the model? Any clarity there would be great.

[Kevin King, executive]

So as I said earlier, in order to create value for the -- for in order for the customers to change their status quo, you have to create value, and value has to be created clinically and value needs to be created from a business point of view. The business point of view is customers want us to be more responsible for the entire service, giving the physician high-quality assurance of a diagnosis and for iRhythm to take care of the rest. The cost for us to do that business side, given that we're an informatics company, not a labor company, if you will, is de minimis relative to the value created. So more people are using our system because of the infrastructure that we've built across the enterprise than would be doing it, if we said to them, here's a ZIO Patch, you curate the data, or here's a ZIO Patch, you curate the data and you bill it and you interpret it. They don't have time to do that, and that's not value creating for them. That's the pivot and that's the unique competitive advantage of iRhythm as a digital informatics and analytics company versus a medical device company. Leverage in the operating expense side is -- comes more from the organization reaching levels of productivity, like the sales force is a big expense item for us right now and for R&D and investing in new products and programs. Those things are driving growth. There are not intended necessarily yet to be contributing to the bottom line. We have a very, very large addressable market and a relatively small market share. And it's our goal and our vision to be the leader in this space and in others, and in order to do that, we need to invest and think of ourselves more as a growth company than we do as a value-oriented bottom line-oriented company. But don't underestimate the strength of the business because with 72% gross margins, there's a lot falling down into the next layer of the P&L.

[Operator]

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Kevin King.

[Kevin King, executive]

Thank you, operator. Thank you all for joining our Q1 2018 call. We appreciate your interest. And I want you to know, we're very happy with our results. And I look forward to talking with you later in the year. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.